B3 S A Brasil Bolsa Balcão : Results Teleconference (Transcript) - 1Q24

International Conference Call

B3(B3SA3)

1Q24 Earning Results

May 10th, 2024

OPENING

Operator: Good morning, ladies and gentlemen, and welcome to the audio conference call of B3's earnings results for the first quarter of 2024.

We would like to inform that all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question-and-answer section when further instructions will be given. As a reminder, this conference is being recorded and broadcasted live via webcast. The replay will be available after the event is concluded.

I would now like to turn the conference over to André Milanez, B3´s CFO, who will be joined by Fernando Campos, Investor Relations' Associate Director.

Please André, you may proceed.

André Milanez: Thank you. Good morning, everyone. And thanks for joining our 1Q24 results call. I'll start with a few remarks, general remarks, and then I'll hand over to Fernando to go in through a little bit more detail about the dynamics, especially on our revenues. I think we saw a first quarter which was not that different from a recent trend that we have been observing recently.

Even though, you know, we had interest rate cuts in Brazil, they are still at high levels and all the uncertainties about the future of interest rates outside Brazil have also contributed to a scenario where recovery in the equities market has not been seen. So, because of that scenario, we saw a negative impact on our cash equities business. But that scenario had positive impacts, particularly on the OTC market and on the listed derivative volumes, which benefit from those uncertainties and that volatility. And once again, that reinforces the resilience of our business model and our diversification in terms of revenues.

As a result of that, we've seen a quarter of stable revenues where all the other businesses have grown and kind of compensated the reduction that we've seen in the equities segment. Even if we exclude Neurotech, which was not present as part of the first quarter of last year, our revenues would only be 1% below in relation to last year. So, I think that's a very positive result, and as I said, once again, that reinforces the diversification of our business model and the resilience of our results.

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In relation to the expenses, as we have been discussing during the 4Q23 results, we had a quarter marked by some non-recurring impacts that we discussed at length with you at that time. Given that, and without those impacts, as we have been saying, it was natural that we would see expenses this quarter returning to levels that were more similiar what we have seen throughout 2023.

If we take into account, we didn't have Neurotech as part of our numbers in comparison to the 1Q23, and let's say non-recurring impact of the Desenrola program, which has revenues associated with it, we would have grown our expenses below inflation - which, I think, is positive and very consistent with what we have been saying to you guys in relation to our cost discipline and our objectives for cost control. I'll pass on now to Fernando to give more details about the operational performance, and I'll get back later on to talk about other highlights.

Fernando Campos: Thank you, André! Good morning all.

Starting with the cash equity segment where we had a ADTV of BRL 23.6 billion in cash equities, which represented a decrease of 7% and 3% compared to 1Q23 and 4Q23, respectively, reflecting the scenario that André mentioned previously. This lower volume impacted the turnover which stood at 128%. Regarding fees, we saw an increase due to the lower day trading volume in the quarter and the low participation of high frequency traders in market making programs and liquidity providers program.

And here, it's important to highlight the importance of our product development agenda. It's worth noting that we saw growth in volumes of ETFs, BDRs and listed funds, which represented 12% of the ADTV in the 1Q24 versus 10% in the 1Q23. In listed derivatives, we saw strong volumes in the quarter, despite the decline that we had in revenues, reflecting the lower revenue per contract in the quarter. Here are two main effects: The first one is some adjustments that we made in the fees of DI futures and some DI contracts impacting the revenue per contract of this kind of contract and the appreciation of the BRL against USD, which affect the fees and the revenue per contract of FX contracts and the interest rates in USD contracts as well. In OTC, we saw a solid growth in revenue of 13% with significant increase in fixed income and Treasury Direct outstanding balance compared to the 1Q23, reflecting as mentioned before the high interest rate scenario. Here it's worth noting that despite the corporate debt market being hot lately, the decrease that we saw in the outstanding balance of corporate models in Brazil represents leasing debentures. We saw there was a high volume of leasing debentures that matured in this quarter, so, that's the main effect here.

Finally, in Technology, Data and Services, it's worth highlighting the growth in the utilization line of OTC - 8% compared to the 1Q23, and that this grows with the fund industry in Brazil, and as André mentioned, it's worth highlighting here that the Data revenue includes Neurotech, which accounted for R$30 million in this first quarter, and we didn't have that in the 1Q23, but here I think it's important to point out that even though we didn't have that consolidated with us, the growth in Neurotech revenue,

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compared to the 1Q23 was 30%, showing a good trend in this business. Now, we're going to return to André. He will be talking a little bit about other highlights.

André Milanez: Thank you, Fernando. Well, as a result of what we discussed in terms of revenues and expenses, we saw our recurring EBITDA amounting to R$1.6 billion in the quarter with a recurring EBITDA margin of 71%, an improvement in relation to what we've seen during the last quarter of last year as a result of those non-recurring items that we discussed.

On Depreciation and Amortization here, I think it is just worth pointing out that there is a significant amount of amortization that is related to the intangibles that were recognized due to the merger between Cetip and BM&FBovespa. These intangibles had an average term of seven years as the merger took place in 2017.

We will start to see from the next quarter onwards a reduction in that line, which is already reflected in our guidance that was disclosed at the end of last year as a result of the end of that amortization. So, a good chunk of that will end from the second quarter onwards. That's just more of a reminder for you guys.

On the financial results and taxes here, there were no surprises. Revenues were higher in comparison to the 4Q23 as result of a higher average balance of third-party funds, even though we saw a decrease in interest rates. On the expenses side, again, behavior was in line with the decrease in the interest rates. But here, the reduction that we saw in the interest rates was offset by the higher level of debt thanks to the debt that we issued at the end of last year in October.

This quarter we had a non-recurring item, which was the recognition of an impairment on some of our platforms. I think there hasn't been anything special about that; we are constantly evaluating our assets, and because of the reduction that we saw in the projected net cash flows throughout the remaining useful lives of some of those assets, we had to accelerate the amortization or recognize a provision for impairment, and that was reflected in the 1Q24 results. Here, I think it is worth highlighting that nowadays, most of the internally developed platforms are being expensed. So, typically, situations where internally developed platforms would be capitalized are more associated with the replacement of an existing technology which has already established cash flow. And we haven't identified any further needs for provision on those assets. And as I said over time, they will become less and less relevant given the change in the accounting criteria as a result of some of the changes that we've incorporated, such as agile methodology, the increase in the use of the cloud, and other things.

On the Net Income and Distribution, we had a recurring net income of BRL 1.1 billion and a statutory net income of BRL 950 million.

Throughout the quarter, owing to the quarter results, there were almost 530 million returned to shareholders, with 293 million paid through as interest on capital and 236

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million in buybacks. We also announced yesterday the cancellation of one hundred million shares that have been bought using our buyback program, which is also very positive. Another thing that was announced yesterday was the issuance of R$4.5 billion in a new series of debentures. Here, we're talking about a pure liability management exercise where we saw an opportunity to issue new debt at a lower cost, extend maturity, and have some positive financial impact as a result of that liability management exercise. So, business as usual here. Nothing specific about that, but it shows our disciplining in managing our liability portfolio.

Finally, talking about some strategic developments that we announced during the quarter. We finally were able to launch the Bitcoin future, something that we had been discussing for a while. It's still early days, but so far, we are very pleased with the results that we are seeing, with the level of traction that the product is getting.

We also launched the VXBR, or the equivalent to the Brazilian VIX, during this quarter, again reinforcing our agenda of bringing new products, meeting market demands, and ensuring that we are contributing to the development of our local market.

And finally, I would like to just make some comments as well about the announcement of changes in pricing for cash equities that we also did during the quarter, which are expected to be implemented next year. For those who are more familiar with the company, this is something that's connected to the same structure that we announced back in 2019. Some of the changes that were announced at that time have been implemented, others were not, as part of some operational challenges that we faced. We have been able to overcome some of those challenges. The main idea here is to simplify our fee structure, to equalize the fees among different types of participants, and we do not, as we said, expect any material impacts in our results due to those changes.

I think that was it in terms of the main remarks. I would like to leave the floor open for questions and answers. Thank you.

QUESTIONS

Operator: Thank you. The floor is now open for questions. If you have a question, please press the raise hand button. If you are connected by phone, dial star 9 to raise your hand. If your question has already been answered, you can leave the queue by clicking on the same button.

Our first question comes from Leandro Leite from UBS. Please, Mr. Leite, your microphone is open.

Leandro Leite: Good morning, everyone. André, Fernando and IR team thanks for the call. My question is related to the Desenrola program. We saw it affecting both top line and expenses during this quarter. Just wanted to get some color if the net effect of this was positive for you and if you could comment if we should see those impacts again in the second quarter? Thank you.

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André Milanez: Thanks for your question, Leandro, and for joining the call.

Yes, the impact was positive. We haven't been disclosing specifically the numbers but, they were positive. So, we had more net revenues than expenses during this quarter.

And you should expect to see some of that also impacting a bit of the second quarter because the program has been extended until the end of May. I don't believe it can be further extended, so, we should still see some implications or some impacts of that program in our results for the second quarter at least up until May. But as I said, it was a positive contribution to our results as we discussed as well in previous quarters, it was also an opportunity that we had to develop a new platform, a new product that can be used for other purposes, so I think. Of course, even though it has a positive contribution, it is more relevant when you look at the expense base given the size of our expense base than it is to our revenue line, but still a positive contribution and we have now a new product that has been developed and that can be further explored in other opportunities other than just the program itself.

Leandro Leite: That's clear. Thank you, André.

André Milanez: Thank you.

Operator: Our next question comes from Mario Pierry from Bank of America. Please Mr. Pierry, microphone is open.

Mario Pierry: Thank you. Good morning, everybody. Two questions from my side. One is on operating expenses. If we annualize the first quarter will reach 1.9 billion reais, while your guidance is 2.1 to 2.3 billion. So, my question is: Is there any chance they will stay below the range, or do you expect expenses to be higher as the year goes by? Also on expenses, are there any new any initiatives that you can take to control expenses more meaningfully. Sure, the revenues, right, it is out of your control, but expenses you can control. So, I'm just wondering given that the outlook is not as positive as we thought it was going to be, if there's anything that you can do on the cost side to support earnings?

And then my second question is related to competition. There were news again during the quarter of a potential new entrant into Brazil, do you have any updates that you can provide us? And then when you look at your systems, your platform, your products, do you think a new player could come in and offer something that you don't offer today, or do you think competition is only going to be based on prices? Thank you.

Andre Milanez: Thank you, Mario. I'll start with the question about expenses and as we said before, we will be working towards delivering an expense growth more in the lower end of our guidance for this year. You must remember that typically during the second half of the year, we have the impact of annual salary adjustments, which are done based on inflation index, and fourth quarter typically has some seasonal impact. So, even though we can try to anticipate any one-offs or things like that differently from what happened last year, there are some seasonal impacts affecting the fourth quarter results. So, I think we are seeing a positive trend, and we are trying to accommodate

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within that guidance, things such as the extension of the Desenrola program for instance.

So, we haven't revised our guidance as a result of that, we are working with some buffers that we are creating as a result of initiatives in terms of efficiency to absorb this, this kind of unanticipated events, but we will be working hard towards delivering expenses at the lower end of our guidance. And in relation to your point about us being able to manage better costs than revenues, I think you're absolutely right. But on the other hand, we also must remember that the operational leverage that we have is very positive when volumes are growing, we see a lot of that revenue growth pretty much translating directly into our EBITDA margins. But when volumes are not that great, there's not that much space in terms of costs that we can cut and that's one of the, let's say, positive and negative aspects of having that structure with that high degree of operational leverage.

Having said all of that, I think what you can expect is that we will keep seeking for initiatives that are bringing more efficiency to the company in order to be able to absorb those unanticipated needs in order to be able to support additional costs that come as we keep launching new products and new services in order to able to deliver a cost growth more in line with inflation. I think the other thing that sometimes investors question us is, whether as a result of that scenario, we should maybe cut back on some of the new initiatives or perhaps delay some of the new product initiatives and that's the sort of thing that we believe we shouldn't do.

Because a lot of that takes time for us before we start to reap the benefits of some of those initiatives, that's what we believe will keep us differentiated from any other alternative that might come to the market and we do believe that by doing that we could maybe help a little bit the short-term results, but we could be putting in danger the long term results and sustainability of our business and that's an area where we believe we should not reduce expenses or investments.

Talking about competition, rumors will be there for a while,this quarter wasn't that different and so far, it seems to us based on everything that we have been hearing from clients, from investors, from analysts, that the isn't anything new as part of their value proposition that is being discussed with market participants and on our side, we do not feel today that there is a big demand for market participants there is not currently being met or in the process of being addressed by the company, so that's where we will keep focusing, on ensuring that we have technology that is meeting market demands, that is competitive when looking at other jurisdictions or best practices outside Brazil as well, and ensuring that we have a very robust pipeline of new products and new initiatives and that we are meeting client demands and anticipating market demands with a very strong pipeline of products and innovations to the market.

Mario Pierry: That's very clear. Thank you very much.

Andre Milanez: Thank you, Mario.

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Operator: Our next question comes from Pedro Leduc from Itaú BBA. Please Mr. Leduc, your microphone is open.

Pedro Leduc: Thank you, guys, so much. On the technology, data and service front, this quarter we had a 10% growth YoY in revenues there, data and analytics up nearly 30, technology and access also up strong. I was wondering if you could talk a little bit more about what drove this performance, clients, products, just a little more color around this. This area seems to be growing nicely. Thank you.

Fernando Campos: Good morning, Pedro. Thank you for your question. So, here, I think there are two main reasons. The first one is the growth in the utilization line of the OTC platforms, which grew 8% in volume YoY, and so we had the effect of the growth in the number of clients accessing the platforms with the growth in the funding industry in Brazil and, we have the impact of the annual adjustment for inflation, that happens every beginning of the year here. On data, I think the consolidation of Neurotech is the main reason. So, we added R$ 30 million on our revenue line there, we saw a growth of 5% in our results. We chose a good trend as well in the data business and other lines as market data, they remain pretty much stable. I remind you a significant part of the market data we charge in USD, and we saw the devaluation of the USD against the BRL. When you compare the first quarter of 24 with the first quarter of 23, which kind of impacted a little bit, not only the derivatives revenues as mentioned before, but also the market data revenue.

Pedro Leduc: Thank you.

Operator: Our next question comes from Eduardo Nishio from Genial Investimentos. Please Mr. Nishio, your microphone is open.

Eduardo Nishio: Hi, good morning. Good morning, Fernando, Milanez and thank you for taking my question. Two questions. Actually, two follow-ups on the technology side. If you can give us an update on the two acquired companies, Neurotech and Neoway. Given the size of the acquisition, I believe expectations are high and if you could share with us an update on your plan to grow - products, cross selling, synergies. In fact, we didn't see much of growth in that line specifically. So, if you can give us an update on that, we'll be nice. Also, on competition. I mean, if you can give us an update on ATG product or initiative. Since they probably need to have interoperability with you guys, if you can give us an update if they are doing that already. The plan I guess is to go almost full exchange, trading and post-trading. If you can give us some color in that, I appreciate it. Thank you.

Andre Milanez: Thanks, Nishio. So, in relation to the acquisitions, as we have been discussing, I think last year was an important year, where we had Neurotech joining the portfolio and a lot of time invested in organizing this data business that we are building with those pieces. Part of the business that B3 had already developed, Neoway already was part of the portfolio since 2022, and Neurotech that arrived mid last year. By putting

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all of that together, integrating the teams, organizing our roadmap of products, our commercial efforts to ensure that we had the right incentives and to maximize cross selling opportunities, quick wins and those sorts of things. We also took the opportunity to organize also the corporate functions of those companies, to create standardized processes to seek for some cost efficiency opportunities as well. A lot of the effort of last year was to prepare this new business that we were creating to maximize the capture of synergies, especially on the revenue side. I think it's early to say that, but I think we have started this year with a more positive outlook. As Fernando mentioned, for instance, Neurotech has posted a growth in revenues in relation to last year of around 30% during this first quarter, that does not appear in our figures because Neurotech was not in our numbers for the first quarter of last year. Neoway is resuming a track of growth, lower growth at this stage, but it's positive because we are reducing churn there and other important measures that have been taken by the management team there. And we also are on track to make the Neoway initiative, as a standalone initiative, sustainable in terms of cash generation. Over time, I think we will start to see more and more of that as a single data initiative for the company, which will have contribution from the acquired companies and from the products that were already developed at B3. But we remain, let's say, very optimistic about the potential that that could have in the long term, for the company.

In your second question about ATG. Honestly, it's a little bit about what I did mention during the question from Mario. I mean, what we know is what probably you guys know, what we hear from clients, what we hear from investors, from analysts. They have been going to the market, saying that they will be offering the trading and the post-trading solution.

So far, we haven't received any sort of contact from them in terms of preparing our infrastructure to connect with theirs, nothing like that. And again, it seems based on everything that we have been hearing, that is going to be a similar offering, that they're not coming with anything different in terms of product or services or technology. You know, we will remain monitoring that situation. We will remain putting a lot of attention in ensuring that our client needs are being met, that we keep our roadmap of products very robust and that we keep bringing these new solutions and new products to the market, meeting their demands and sometimes anticipating some of them as well.

So, I think we will keep focusing on that agenda, and I think so far there hasn't been any significant developments or news on that front.

Eduardo Nishio: Great. Thank you so much.

Operator: Our next question comes from Tito Labarta from Goldman Sachs. Please, Mr. Labarta, your microphone is open.

Tito Labarta: Hi, good morning. Thank you for the call and taking my question. Andre, I have a question on your capital management. I mean, you continue to generate cash, you've been paying dividends and buybacks, but just given the sort of the slow growth that you're seeing in revenues, do you think there's more room to increase some of this capital distributions, either in the form of higher dividends or buybacks from here?

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Andre Milanez: Hi, Tito. Thanks for your question. Look, I think what if you look, we are distributing after the investments pretty much all our cash generation.

There's always a discussion as to whether we should increase. We could increase, potentially leverage and maximize distributions to shareholders. I don't see that happening now, that could be potentially an alternative. If we have other discussions, for instance, in relation to the interest of capital or the other things and, as we have been saying, we have been typically distributing our cash return to shareholders between cash payments, interest on capital and dividends and buybacks, roughly speaking, half in cash payments, half in buybacks, tilting that more towards one and on another depending on market conditions, on price, etcetera, you can expect us to keep doing the same. But today I think you should consider we've given you guidance as what's going to be our policy in terms of payout and cash return to shareholders.

Tito Labarta: OK, great. Thank you, Andrew.

Operator: Our next question comes from Guilherme Grespan from JP Morgan. Please, Mr. Grespan, your microphone is open.

Guilherme Grespan: Thank you, Andre, Fernando. Two questions on my side. The first

one is just a follow up on the previous one: on the buybacks, just to be clear, what is the appetite to have on increasing the share of buybacks in this distribution and if we have the debate, if we're going to do buybacks or maximize IoC. What is your view? I imagine the view it's still to maximize the distribution, but I just want to see whether you can increase this buyback share on the total return to shareholders.

And the second one is related to the tax reform. We had the first draft of the special regime. Just want to hear your initial views on what are demand debates to B3. If you can have already an initial assessment, whatever you can share regarding this text bill. Thank you.

Andre Milanez: Thank you. On your first question, I mean, we will always maximize the tax benefit on the IoC, but we can reduce dividends and increase buybacks or do the opposite, depending on market conditions, as I discussed. So doing more buybacks does not mean that we will not enjoy the full benefit of the IoC. I think the thing that will vary in that equation is going to be the amount of dividends. So, I could distribute less dividends, still maximize IoC distribution and have the tax benefit and maybe do more buybacks. The way we have been doing, as I said, is tilting that more towards one or another, depending on market conditions. We have a buyback program open; we have executed a good chunk of that during the first quarter and we will keep doing that and if we feel that we need to increase that, we could always do that. But today I think we have the tools to follow that strategy that we already announced. But I think it is important for you to understand that there is no tradeoff between doing more buybacks and maximizing tax benefits on the IoC side.

The second question regarding the tax reform, I think it's still very early to assess any potential implications. One of the key things in order to be able to do that is going to be

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the rate, the tax rate, which hasn't yet been defined. But what I can share with you is that one of the things that we had been working towards last year, as part of the discussions around the constitutional amendment, which was to ensure that our activity would have similar treatment to the financial services industry, I think we were able to achieve that with the draft of the new law, specifically creating that differentiated regime for the financial services industry, which I think it is in line with our discussions and our expectations.

But again, in terms of potential implications, still too early to tell, but so far it has been progressing as we were expecting. OK?

Guilherme Grespan OK. Thank you.

Operator: Our next question comes from Carlos Gomez Lopez from HSBC. Please, Mr. Lopez, your microphone is open.

Carlos Gomez Lopez: Hello. Good morning and thank you for taking my question. I wanted to ask you first on the technology and data side that you made these two acquisitions, you seem to be satisfied with the way the companies are going. First, do you need to at some point have any impairment given that on one of them, you know, it's only now we're starting to see growth.

Second, is this market, one in which you might consider further acquisitions in this area, or you are satisfied already with what you have? Thank you.

Andre Milanez: Hi Carlos and thanks for your question. In relation to your first point about potential impairment of the business, this is something that we are constantly monitoring. We, yet, have not identified any need for impairment losses. This is mandatorily tested annually, but given that some of the growth that was being expected in the short term has now been postponed a little bit, that, let's say, reduced our access in terms of the value in use of some of those companies, in relation to the acquisition cost, but so far we haven't identified any need to recognize any permit losses as part of those acquisitions. But we will keep monitoring that very closely. But we are on a more positive trend now, I guess, than we were before. And your second question was about…

Carlos Gomez Lopez: No need for further research. In fact, it's a more general question. Do you need to buy more, or do you need to sell more? I mean, are there businesses where you want to get out of?

Andre Milanez: No, I think those were the two assets that we had identified that we believed were important to deliver our strategy on data. The focus now is on the execution. As I said, we've invested a lot of time last year organizing that data initiative that we have created by connecting initiatives that were already being developed in B3, the Neoway business, the more recently acquired Neurotech business. There might be some small add-ons here and there, but definitely nothing of the size of what those two

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